MODULE: OVERVIEW OF FINANCIAL MANAGEMENT

FINANCIAL MANAGEMENT
Financial Management means planning, organizing, directing and controlling the financial
activities such as procurement and utilization of funds of the enterprise. It means applying general
management principles to financial resources of the enterprise. It denotes the effective acquisition and
use of money. The entrepreneur as financial manager must determine the best way to raise money. It
is also important that the money should be used effectively in realizing the goals of the enterprise.

Scope of Financial Management

Some scopes of the financial management are:
Investment Decision. This involves the evaluation of risk, measurement of cost of capital and
estimation of expected benefits from a project. Capital budgeting and liquidity are the two major
components of investment decision. Capital budgeting is concerned with the allocation of capital and
commitment of funds in permanent assets which would yield earnings in the future. A measure of the
extent to which a person or organization has cash to meet immediate and short-term obligations, or
assets that can be quickly converted to cash. It is the ability of current assets to meet current liabilities.
Financing Decision. While the investment decision involves decision with respect to composition of
mix of assets, financing decision is concerned with the financing mix or financial structure of the firm.
The raising of funds requires decisions regarding the methods and sources of finance, relative
proportion and choice between alternative sources as well as time of floatation of securities. In order
to meet its investment needs, a firm can raise funds from various sources.
Dividend Decision. In order to achieve the wealth maximization objective, an appropriate dividend
policy is to decide whether to distribute all the profits in the form of dividends pr to distribute a part of
the profits and retain the balance.
Working Capital Decision. This is concerned with making decisions related to the investment in
current assets and current liabilities. Current assets are convertible into cash within one year. Similarly,
current liabilities are those which are likely to mature for payment within an accounting year.

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Functions of Financial Management
Financial management functions in the following areas:
1. Estimation of capital requirements. Estimation have to be made in an adequate manner which
increases the earning capacity of an enterprise.
2. Determination of capital composition. Once the estimation has been made, the capital structure
has to be decided. This involves short-term and long-term debt equity analysis. This will depend
upon the proportion of equity capital a company is processing and additional funds which is to
be raised.
3. Choice of sources of funds. For additional funds needed, a company has many choices such as
issuance of shares of stocks, loans from banks and financial institutions and issuance of bonds.
4. Investment of funds. The financial manager has to decide to allocate funds into profitable
ventures so that there is safety on investment.
5. Disposal of surplus. This can be through dividend declaration or using the retained earnings for
expansion, innovation and diversification of the company.
6. Management of cash. The financial manager has to make decision as regards cash management.
7. Financial controls. The financial manager has to exercise control over finances. This can be done
through many techniques like ratio analysis, financial forecasting, cost and profit control, etc.

Objectives of Financial Management

1. Financial Planning generally refers to the allocation of financial resources. In accordance with
the company’s financial objectives and standards, projects or activities and operations are
carefully planned, evaluated based on certain criteria and subsequently ranked for the allocation
of financial resources.
2. Financing involves the procurement of funds. Procurement function requires awareness of
different sources of funds with varying requirements and conditions.
3. Investment entails the effective and efficient utilization of financial resources. Financial
resources must be utilized in a manner that minimizes company costs arising from wastage and
loss of opportunities due to delays in operations and idle and nonproductive resources. It
requires adoption of effective control measures.

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 Efficient utilization of financial resources refers to their economical use. In other
words, one sees to it that financial resources are actually being used for what they were
intended. Inefficiency in the usag of resources maybe caused by extravagance in the choice of
property or equipment, unnecessary expenditures, tardiness of personnel and non-productive
resources.
Effective utilization of resources refers to their use towards the attainment of
predetermined objectives. This requires a periodic review of operations to determine whether
they are in accordance with plans and whether the plans, as prepared, will enable the company
to attain short term and long-term objectives considering the changes brought about by
economic development.

Financial Manager
The financial manager is a member of the firm’s top management with expertise in the
management of financial assets. He participates in the corporate strategic planning, makes financial
decisions to promote the successful operations and growth of the firm. He is an adviser of the firm
regarding advantages and costs in the prevailing market using his expertise because of his wide
imagination and proficiency in costing. He can project to a certain degree of accuracy the organization’s
capital structure based on available statistics. He supervises the efficient utilization of the firm’s assets
in order to achieve adequate profit as management goal.

The Role of the Financial Manager

1. Analyze and plan the company’s performance. Analyzing and planning company’s
operations occupy much of the financial manager’s time. Company progress depends on the
management’s knowing where the company now and where in the future it wants the company
to be. The financial manager gives opinion on the consequences of the different alternative
courses of action.
Assessing the financial strengths and weaknesses of the company requires the financial
manager to work with people from accounting, marketing and production. Company
accountants develop the income statement showing sales revenues and expenses for a period
of time; they also prepare the balance sheet which is a listing of company assets , liabilities and
the owner’s equity. Based on these financial statements and projected versions of these

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 statements, the financial manager assesses company strengths and weaknesses, both currently
and in the future to a large degree, the plans of the production department and sales forecasts
of the marketing department.

2. Anticipate the company’s financial needs. The need to anticipate future events is one of
the roles of the financial manager. Forecasting company expenditures for assets and their
required financing avoids surprises and the problems these surprises create.
➢ Being involved in the planning process of other departments and top management.
➢ Monitoring developments in the economy that impinge on the company’s products.
➢ Keeping track of what is happening in the markets for the company’s securities.

To develop reliable forecasts and plans, a financial manager must understand not only
finance and accounting but company operations as well; product lines, manufacturing
processes, customer groups, potential suppliers of raw materials, vendors of equipment and
so on. A basic understanding of the operations enables the financial manager to identify and
anticipate costs of future asset acquisitions and needed financing.

3. Procure the funds the company needs. Financial managers procure and manage funds that
a company needs to finance operations. To obtain these funds, the company can issue shares
of stocks, borrow money or use a combination of the two. The company that borrows must
repay its debts at maturity.

4. Allocate funds to acquire the most profitable assets. Equally critical as the financing
decision to the success of a company is the investment decision, the process of allocating funds
for investment in competing assets. The investment decision must not overemphasize one sort
of asset and slight another. For instance, it would be unwise to use so much cash to invest in
a building that the company could not pay its bills when due. The financial manager plays a key
role in the allocation of funds to competing assets. The goal is to select fixed assets that will
generate large returns and minimal risks.

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Vital Functions of the Financial Manager
1. Identification and analysis. The financial manager is partly in charge of the management of
the financial assets of the corporation. He is also responsible in identifying the present strengths
and weaknesses of the organization.
2. Financial planning and strategy. The financial manager considers the major financial factors
to make the firm survive or develop, including activities such as fund raising, maximization of
profit, financing and expansion development and many others. It includes the preparation of
different budgets as they form an important part of financial planning.
3. Capital structure of the organization - The financial manager is an adviser of the
organization regarding the advantages and costs of investments in the financial markets and
any other future plans. With his expertise as an accountant, he has a wide imagination and
proficiency in costing. He can project with a certain degree of accuracy and based on statistics
and costs, expenses of a certain project; the required capital outlays, any change that may take
place in the organization’s assets.
4. Stock price and dividends - The financial manager gives advice to the firm if dividends should
be declared or not. Likewise, when the firm has such highly profitable undertaking that should
retain most of the earnings, stockholders are properly warned of such a plan, and gives the
assurance of possible equivalent appreciation of the price of the stock certificates in their
possession.
5. Control of cash and other assets - It is also the intention of the financial manager to strive
to achieve adequate profits as a management goal, done in such a way that cash is always
available when needed. The needed cash should be with the level needed by the operation of
the business. Since cash is a non-productive asset, any excess cash must be invested into
placements that are possibly easily convertible to cash as an assurance to fill any cash deficiency
falling below the minimum cash requirements of the operation of the business.

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The Financial Manager in a Business Organization
The finance manager in a business organization is not always called as such. His title varies
depending on the size of the company and its organizational set up. In small business firms, the
finance functions are discharged by the sole proprietor, the accountant or the manager. As the
organization grows bigger, the organizational set up becomes more sophisticated so that we may have
the finance functions delegated to the controller or the treasurer. In some cases, there is a vice
president for finance to whom the controller and treasurer reports. The finance functions are usually
divided between the controller and treasurer as follows:
CONTROLLER TREASURER
1. Planning for control which includes 1.Determination of financial
budgeting. requirements and procurement of
funds
2. Reporting and interpreting results of 2. Cash management, banking,
operations and system installation custody of funds and foreign
exchange problems
3. Evaluation of objectives, policies and 3.Investor relations
procedures in all segments of
management regarding the same
4. Tax administration and government 4.Corporate investments
reporting
5. Protection of assets 5.Credit and collection
6. Economic appraisal (forward 6.Insurance and employee benefits
planning)
From the foregoing distribution of functions, it may be noted that the controller takes care of
the internal finance functions while the treasurer takes care of the external ones.